Growing Dividend REITs

Post Properties

It was a bittersweet week for apartments REITs – at the same time they have posted strong fourth quarter 2015 results, they also suffered losses. On average, apartments stock prices fell by 4.1%, almost as much as timber, which fell by 4.3%. Increased supply and deceleration of the West Coast market growth are some of the reasons why the shares declined.

Together with Aimco, Mid-America Apartment and Post Properties, the following apartments REITs have released Q4-15 results:

AvalonBay Communities increased its quarterly dividend by 8% and released strong results. Core FFO grew 14.4% for the quarter and 11.4% for the full year. In 2016, Core FFO is expected to grow slightly below at 9%. However, this was not enough to excite the markets and its share price decreased by 3% last week. AvalonBay showed caution when referring to the West Coast. The company has seen slowing job growth and, although it still believes the West Coast will outperform the East Coast, the difference in growth will narrow.

Essex Property Trust, which is focused on the West Coast, fell by 5% last week. The company confirmed expectations of a less heated market on the West Coast due to a moderate job growth rate. Specifically, they believe market rents will increase by 7.5% in Northern California in 2016, down from the 2015 average of 10.9%. Nonetheless, Essex closed the year of 2015 with an impressive 15% Core FFO increase. Since its highest share price ever on December 29, 2015, the share price has declined.

UDR increased its dividend by 7%. Despite its strong results and not being as exposed to the West Coast as Essex, its share price fell by 5% last Friday.

Other highlights:

Armada Hoffler Properties increased quarterly dividend by 6%.

Hersha Hotels entered into a joint venture partnership with Cindat Capital to which they will sell a significant stake of seven hotels in Manhattan. The company intends to use the funds to invest in other locations and reduce its exposure to New York City. The stock went up by 7% last week.

After posting good Q4-15 results, DuPont Fabros went up by 4% this week. It appears that management has contained losses regarding the replacement of a bankrupt tenant.

Disclaimer: This is not a recommendation to buy or sell stocks. The highest-yield stocks are not necessarily the best portfolio investment choice. The purpose of this report — which is essentially a snapshot of information available on February 5, 2016 — is to reduce your stock analysis by enabling you to compare stock and sector performance. Please do your own due diligence before making any investment decision.

As of January 31, 2016, the equity REITs are constituent companies of the FTSE NAREIT All REITs Index. Companies whose equity market capitalization is lower than $100 million have been disregarded.

This report is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.

From a dividend generation standpoint, Terreno Realty Corporation (NYSE:TRNO) was our best performing industrial Real Estate Investment Trust (REIT) in Q2. The company continues to show positive figures into Q3, especially the metrics associated with cash flow generation and profitability continuing to line up with the previous quarter’s numbers. Few metrics, such as occupancy, have decreased. Please review our Q3 versus Q2 comparison as listed above.

Terreno’s revenue, FFO per share, and dividend per share have shown two-digit growth, although their portfolio occupancy decreased from 94.4 to 90.2 percent (Q2 vs.Q3). The same thing occurred to the company’s same store occupancy due to 271,000 square feet of vacancy at the Interstate properties in the New Jersey/New York market. This is one of the six markets that company operates in. In addition, there are 85,000 square feet of unoccupied space at property that is being held for sale.

Terreno’s stock ($TRNO) has performed particularly well with a return of 6.4 percent year to date. The median sector return is a paltry negative 3.6 percent. The company’s dividend yield reports in at 3.3 percent for a 3.7 percent sector median. When all is said and done, a total return of 8.7 percent is fairly good when compared to the major indices.

Terreno Realty Corporation maintains an aggressive acquisition spree, although it has decreased a bit from previous years. This year they have added 1.8 million square feet which contributed to a 13 percent net increase in overall size. Last year Terreno grew more than one third in size. Management reaffirmed their intermediate goal to triple their US$1 billion assets in a letter to shareholders earlier this year. They plan to fund this with two thirds equity and one-third debt.

We were approached by several readers regarding the high valuation of the company. Terreno has definitely entered into premium territory with a price-to-FFO of 24x in a category where the sector median is at 18x. In addition, the company’s dividend yield of 3.3 percent is slightly below the median. Due to Terreno’s recent performance and aggressive growth goals, we believe that the company will remain in this territory for the long run.

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.

Although we are are not very keen on external management, we featured the Ashford REITs–Ashford Hospitality Prime (NYSE:AHP) and Ashford Hospitality Trust (NYSE:AHT)– a couple of weeks ago (Note: insider ownership for the Ashfords is between 14 and 15 percent). Eventually, Prime turned out to be better than Trust from a dividend generation potential. In fact, in Q2, Prime demonstrated one of the best performances among all hospitality REITs, which resulted in its inclusion on our watchlist. However, Prime’s performance took a dive in Q3 which caused us to take several steps back.

Pro-forma hotel EBITDA, which measures internal growth, went from 10 percent year-over-year in Q2 to -3 percent in Q3. Also, adjusted FFO dropped from 33 to -7 percent. Finally, although management targets high debt levels, total debt to total capitalization rose to 57 percent.

Looking at specific metrics associated with hospitality, Q3 has also clearly underperformed in comparison with Q2. RevPAR and ADR both had lowered growth, and occupancy dropped.

Management defends Q3 as an anomaly and things are going to get back to normal in Q4. Hotels under renovation and holiday mismatch between this year and last year have contributed to the drop. They even split pro forma figures between all hotels (11 hotels) and hotels not under renovation (9 hotels), but the results have not been encouraging. Regarding the holidays, this is what management said:

“Headwinds during the third quarter came from holiday changes including Labor Day falling a week later this year which extended the summer season and reduced business travel and the Jewish holiday of Yom Kippur, which fell in the third quarter this year and the fourth quarter last year, which also negatively impacted business in the third quarter.”

Despite a drop in share price following the release of the results, the valuation metric price-to-AFFO continues in line with the sector. Dividend yield continues low, but so does the dividend payout.

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.

This past weekend the market was struck by the announcement that Weyerhaeuser (NYSE:WY) and Plum Creek (NYSE:PCL) are merging. The two entities will become one larger company under the Weyerhaeuser name. Weyerhaeuser shareholders will maintain the majority 65 percent of the share pool. The company will be based out of Seattle, Washington.

Both of these REITs have the largest market capitalization in the timber sector, each owning over six million acres in the United States. They say that scale will end up leading to annual cost savings of US$100 million. Of course this news has led to rumors of potential layoffs. Although Weyerhaeuser already enjoys presence in the Southern US, the acquisition of Plum Creek will certainly strengthen their footprint in the region. Consequently, the company will be in a far better position in the domestic market and housing recovery.

The timber category trailed other REIT sectors in the second quarter, as we have talked about several times in our weekly reports. This is due to the fact that the housing market has not recovered as soon as initially predicted. In addition, the strengthening of the U.S. Dollar has resulted in more expensive US timber abroad and made Canadian lumber far more competitive. Also, Chinese markets have failed to absorb supply, resulting in increased inventory at their ports. Different from the third quarter, results in the second quarter were not good.

The Q2 weak results combined with the selloff in August decreased timber REIT stocks as a whole. Timber stocks were down 14 percent year to date as of last Friday. Weyerhaeuser stock was down 15 percent and Plum Creek stock decreased by 6 percent. CatchMark Timber Trust (NYSE:CTT) was the only flat timber REIT stock this year.

Those factors have certainly put a lot of pressure on the timber industry. As we can tell, it has led to major action. In an environment where timber prices are put to the test, operational synergy is just one of many reasons that a merger of this size makes business sense. In the end, the costs need to decrease, and the performance must increase.

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.

Ryman Hospitality Properties (NYSE:RHP) enjoyed a good run last week — its 7.2 percent return was the best among the 175 U.S. equity REITs we track. Following the Q3 results release on November 3, Ryman has released a stronger per-share Adjusted FFO than in Q2. This time, in fact, we are not surprised to see a hospitality REIT lead the stock performance — the sector has demonstrated strong fundamentals and is among our favorites.

Year-over-year per-share AFFO has spiked by a whopping 37 percent, potentially demonstrating the best mark in growing FFO in the sector during Q3. However, since other metrics associated with the dividend generation have remained equal or below, that was apparently the only reason for the good stock rally. Revenue growth went from 6 percent in Q2 to 3 percent in Q3; same-story hospitality EBITDA dropped from 10 to 8 percent; and occupancy decreased from 76 to 72 percent. Check out the above comparison for details.

Believe it or not, despite strong Q2 results, Ryman was not among our top choices in the hospitality sector. Even projecting a 40 percent per-share AFFO increase in 2015, it has demonstrated weaker-than-sector-average figures — revenue growth, dividend payout, occupancy and total debt to capitalization. The 5 percent dividend yield is in line with the sector’s 4.8, and price-to-FFO (12×) is equal thereto.

Ryman is a unique company, with four large hotels that source income mainly from group events, in locations where guests can stay in hotels and enjoy amenities; the last fact makes food-and-beverage exceed room revenues. Because of their size, their hotels rank among the top largest in America, competing with those in Las Vegas and Orlando. They are located in Dallas, Nashville, Orlando and Washington.

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.

Timber is looking up, according to the Q3 results which were released this past week. Following a Q2 with falling revenues for most stocks, Q3 results have been better in terms of revenues and earnings per share. As a result…Read More>>

From a dividend-generation perspective, our Q3 ranking indicates that National Retail Properties (NYSE:NNN) still posts stronger results than Realty Income (NYSE:O). The companies have much in common — both invest in properties subject to long-term net leases. Their dividend track record is also great, having made increased distributions for 26 and 21 years respectively, and the results for both have been better in Q3 than in Q2.

Dividend payout ratios decreased as AFFO-per-share growth increased. Occupancy was slightly better, and the levels of total debt to capitalization have been kept conservative. However, as the table indicates, NNN continues to outperform Realty Income metric by metric.

During the Q3 conference, National Retail’s management clarified that they continue to see strong job creation in Texas, despite lower oil prices. The company has a large footprint in Texas, where a significant portion of Realty Income’s portfolio — though less than National Retail’s — is also located. Tenant wise, National Retail’s portfolio is skewed to convenience stores and restaurants.

In valuation terms, NNN’s entry point is slightly better than O’s. Its price-to-FFO is at 17×, compared with Realty’s 18×. NNN’s and Realty’s dividend yields are 4.5 and 4.6 percent respectively.

Just to clarify: There is no ocean difference in the performance of the two companies, which both have overall performance as well as freestanding retail, the sector to which they belong. In fact, freestanding has performed in line with REIT stocks generally. However, we see that National Retail has an edge.

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.